Lockwood Advisors, an investment advisor subsidiary of BNY Mellon Corp., has agreed to pay a $200,000 fine for failing to monitor and disclose "trading away" fees charged in its separately managed account wrap program, the SEC announced Tuesday.
Since 2008, the firm, based in King of Prussia, Pa., and affiliated with BNY Mellon's Pershing LLC, has failed to disclose to clients and RIAs using the wrap program the details of "trading away" fees that have been charged by third-party portfolio managers in the program, the SEC said in its complaint.
Trading away, also called "step-out trading," is when portfolio managers execute trades through broker-dealers that do not participate in the Lockwood wrap program. These trades trigger extra fees that are typically charged to wrap clients and their RIAs on top of the annual wrap fee, the SEC said.
"Despite paying these costs, wrap program clients were not notified that particular trades were stepped-out nor, if applicable, how much step-outs cost on top of the wrap fee," the SEC said in the complaint, which added that step-out trading, when conducted properly, can provide clients with benefits such as improved execution quality and access to illiquid securities.
The SEC's complaint did not specify how much in extra fees Lockwood's wrap program clients have paid since 2008, but the complaint noted that more than 100 of the 250 portfolio managers who participated in the program traded away. Between 24 and 52 managers per month traded away, with many of them doing so on a "consistent and ongoing basis," the SEC added.
Clients were not informed of the extra fees "because their account statements and trade confirmations disclosed only the net prices charged per trade, with any transaction costs included in the price of the security," the SEC's complaint said.
The consent agreement with Lockwood came after the SEC initiated a cease-and-desist administrative action that accused the firm of violating the Investment Advisers Act of 1940.
The SEC said in its complaint that, although it's up to RIAs in the wrap program to judge the suitability of portfolios that they use for clients, Lockwood Advisors is charged with the responsibility of providing RIAs with the information required to make those judgments. Lockwood failed to monitor portfolio managers on its platform about their step-out trading, and also failed to disclose any such data to clients, the SEC said in its complaint.
The lack of oversight meant that RIAs were unaware of the trading away fees before choosing portfolio managers in the program, and were also unaware of the fees after they were charged, according to the complaint.
"Lockwood did not provide the advisers with enough information to perform that evaluation," the SEC said in its complaint.